Agents of change

14 August 2012 Reporter

Real Estate Business’ recent ‘Switching Networks’ survey gave some insight into the type of agency business in which industry professionals want to work. In this first part of a two-part series, we delve deeper into the key industry and consumer trends that will change how you operate in the real estate industry.

IN LAST month’s cover story, ‘Making the Switch’, principals and agents outlined why they would either leave or join a real estate network or independent agency.

The article was based on the findings of Real Estate Business’ Switching Networks survey, conducted online during May and June, which attracted 225 respondents from across Australia and with a majority – more than 81 per cent – licensees and/or principals.

Key findings included:

Respondents were evenly split between real estate networks or cooperatives (52 per cent) and independents (48 per cent)

Almost one in four (24.2 per cent) said they review their network agreement and/or their independent status every 12 months

The main reasons for changing real estate companies were brand (16 per cent said they would change for this reason), followed by lack of head office support (13.8 per cent) and level of the franchise fee (12.1 per cent)

A robust IT and technology platform was what respondents wanted most when joining a new company, with 70.7 per cent ranking this as very important

Other very important factors that respondents ranked highly included head office support (68.5 per cent); brand (67.4 per cent); training and education (64.5 per cent); marketing/advertising support (64.4 per cent); and level of franchise fee (60.9 per cent)

When asked what groups and/or independent options they would consider when considering a new company, 42 per cent of respondents said they would consider setting up their own independent agency or joining an already established independent group

A majority of survey respondents identified at least one franchise group they would approach if looking to start a new agency

These survey responses – along with interviews with some leading business brokers from around the country – helped reveal a range of broader issues that are influencing the real estate industry.

Some are well known; several other issues revealed during the survey raise deeper questions about how agencies might evolve in coming years.It’s these issues – which may influence how you manage your own agency in the future – that form the basis of this article. Real Estate Business spoke with numerous senior executives, both from small independent operations through to larger networks, to get their insight on these key agents of change.

We also sought their feedback on some of the findings of the Switching Networks survey.

Mark Sinclair, CEO of Perth-based Realestimations, a company that provides business brokering and support services to the industry, told Real Estate Business that an increasing number of principals are seeking more flexibility within the franchise model.

If real estate franchising is to grow, he says, there needs to be a much greater understanding of the relationship between franchisee and franchisor.“It must be more focused on building a business relationship, understanding how to add value, more flexible – particularly if the relationship breaks down – and [it should include] how the brand awareness should grow the business,” Mr Sinclair says.

However, according to Stewart Bunn, national communications manager at First National Real Estate, there isn’t too much room for flexibility in a franchise model.

“Fundamentally, the answer should be no,” Mr Bunn says, when asked whether franchise agreements should incorporate more flexibility.

“Adjusting agreements arbitrarily to suit individual franchisees/members is detrimental as well as unfair to any network’s greater membership. Unity is vital, particularly in a cooperative, and collective commitment to any brand is undermined by preferential treatment of individual franchisees/members.

There is evidence, however, that some franchisors do engage in such conduct.”

Sean Green, operations manager at Raine & Horne, agrees that there are also broader considerations.

“If your franchise agreement is fair and reasonable, it’s difficult to be flexible as it is not simply a document outlining an arrangement between Raine & Horne and a single office,” Mr Green says. “It is also an agreement that protects the businesses and reputations of the large network of offices in Australia, Asia and Europe who are also part of the Raine & Horne group.”

“The clauses in the document protect all our offices and if an office isn’t measuring up, the franchise agreement sets in stone the triggers for managing this situation.

“Many of the big networks would have similar franchise agreements; however, the Raine & Horne version is one of the tightest. But there are no twists or tricks, there are just mechanisms ... in place to protect all our franchisees.”

Georg Chmiel, chief executive of LJ Hooker, points to the 36 offices that have joined the group in the past 12 months as evidence that its franchise agreement works well.

“Our franchise agreement has been developed over many years and continues to be attractive,” he says.Richardson & Wrench’s group franchise manager, Peter Flynn, says his network allows for quite a high level of flexibility, such as allowing offices to create their own websites.

“We have very strong philosophical directions in terms of brand,” he says. “The brand is not a logo, it is a philosophical positioning. As long as there is strength in that, you can interpret that in a number of ways and have inherent flexibility. The message in [Sydney’s] eastern suburbs is different to the message in [Sydney’s outer western suburb of] Rooty Hill.

“We wanted a brand approach that is not ‘one size fits all’ and which can be applied to every demographic that we operate in. We prefer to empower franchisees to meet the needs of the market.”

In April’s Real Estate Business, Greg Hocking, of the Melbourne-based agency of the same name, wrote that franchisor and franchisee relationships work best when there is a “healthy tension” between the two.

“As with any relationship, a franchise relationship requires give and take,” Mr Hocking said. “Each party should come to the relationship after carefully sizing up the other. Too many franchisor/franchisee relationships begin like an impetuous new romance, but when the honeymoon is over both parties are left counting the cost of their not-so-perfect-match.

“A 12-month opt in/opt out option for both franchisor and franchisee is a sensible arrangement that gives both parties the chance to get to know each other before committing to the long term.”

A common complaint uncovered in the Switching Networks survey was the lack of support from the franchisor, something Mr Hocking acknowledges is critical to the success of a franchise arrangement.

“A business that cultivates collaboration and open communication will invite participation from key representatives across the franchise group and give these key stakeholders a voice,” he says.

“It’s through committed collaboration that many of the benefits of franchising become most apparent: cross-referral of business, mentoring and professional development opportunities, benchmarking and greater leverage of the brand.”

The best way to manage a franchise is to be “firm but fair”, he adds.

“The franchisees are our clients – we have to listen,” he says.

Mr Hocking has frequently brought in a selection of franchisees to road test new policies or structural changes being contemplated. Once they were on board, the changes could be introduced across the network.

A further measure of flexibility, by no means unique to Greg Hocking, is to allow an individual’s name to be part of the company name. This is the case with Mr Hocking’s eight offices, and he feels it might give his office some level of cut-through in markets saturated by franchise brands.Peter Flynn, meanwhile, believes franchisors must adapt to a new market reality.

“Franchisors need to be adaptable, nimble and able to respond quickly to changes in the marketplace and franchisor needs,” he says.

“The mindset of the franchisor needs to move away from the presumption that they can tell their franchisees what is good for them and accept a role as the facilitator of good ideas from around the network and the industry.”

A ‘different’, but not necessarily unique agency model can be found in Tasmanian real estate group, View Australia. The group, which is six offices strong, is jointly run by the president of the Real Estate Institute of Tasmania (REIT), Adrian Kelly.

Mr Kelly, who once worked for a large real estate franchise group, said the model is a 50/50 joint venture, with a parent company (View Australia) owning 50 per cent of each business or office and the salespeople (partners) owning the other 50 per cent.

“A separate company, View Support, provides all of the support to each business and in return charges a fee for service,” he says. “This fee is the same that a franchisor might charge, but in our case we provide much more service by way of centralised administration fulfilling such functions as GST, payroll, centralised trust account management, accounts payable etc.”

A key difference from the traditional franchise model is the ‘sharing’ of an agency’s ownership.“We are a franchise by definition, but in our case the franchisor actually owns 50 per cent of the business,” he says. “This guarantees that our focus remains on profitability and support rather than turnover alone.”

“We have found that in our businesses two things tend to happen: expenses go down and income goes up, thus resulting in greater profits. Our partners are those good performing salespeople who wish to own a share in their own real estate business but who don’t know – nor do they want to know – how to do the ‘stuff’. This is all looked after by the support company.”

“They earn a premium commission in return for doing this and twice per year, funds permitting, dividends are shared between all stakeholders.” He says a key element of this model is its ability to give all employees a slice of the action, thereby providing an added incentive to build profitable businesses.

“Our partners and all employees – even the part-time receptionist, who isn’t a selling partner – have the opportunity to invest in the parent company, View Australia.”

The partnership (shareholder) agreements include a process for a partner wishing to leave or retire, he adds.

“Their shares (as in the total business) are valued independently and must first be offered to the other partners, not View Australia’s 50 per cent – we never want to own more than 50 per cent of any business,” Mr Kelly says.

“If the other partners don’t wish to purchase the shares they are then offered on the open market. In practice, we expect that when a partner wishes to leave the business that we [all partners] would find a replacement partner for that business.”

Mr Kelly believes many other estate agency businesses run into problems, when ‘rules’ like these are not set up properly from day one. “When something goes wrong or a partnership split occurs there are no set guidelines in place for dealing with the shares,” he says. “We wanted this issue to be sorted from day one.”

Paul Davies, managing director at One Agency, says his group’s model, which isn’t franchise-based, incorporates a degree of flexibility into its agency licences.

“The licence agreement period is flexible to meet the requirements of the licensee,” Mr Davies says. “The standard period is three years, with a three-year option, which most members are happy with. The licence agreement also provides for an initial six-month establishment period, during which time a licensee can terminate the agreement at any time, without penalty. Some members have requested longer terms which are also agreeable.”

One Agency has more than 50 licensees spread across Australia.

Like Mr Kelly’s model, there are provisions for when things don’t go according to plan.

“We have had only a few people leave the group for various personal reasons,” he says. “We are always respectful of members’ circumstances, and have in all cases been agreeable to the member terminating the licence without penalty.”

Perhaps the ultimate in flexibility, however, lies with the independent agency if Jay Standley of Bunbury, WA-based Barr & Standley is anything to go by.

“What I like about the independent model is that if we see something that we want to change and adapt, we only need the consensus of just my co-owner brother [Rhys] and me to do it,” he says.

“This is particularly important considering everything now is about pace and change. ”

“For example, when it comes to marketing we can do things on the spur of the moment if need be. It’s great that we can tailor our marketing and services to a specific vendor or market without having to seek approval from others.

Overall, Mr Standley likes the freedom of being an independent: “I prefer to be more of a maverick than part of a bigger group,” he says.Barr & Standley was formerly with a large real estate group about 10 years ago and became its top performing office in WA. One of the things Mr Standley didn’t like, however, was how another office’s poor performance could tarnish his reputation.

He left that group when it opened up a competing office nearby.

As our report in the July issue of Real Estate Business found, however, being independent doesn’t mean you’re necessarily isolated.

According to Graeme Hosking, managing director of WA-based Ausnet Real Estate Network – which provides support services for independent agencies – you can also feel isolated working for a franchise group, particularly in regional and remote areas.

Independents do need and appreciate having some support, he says, having recently added three more independent agencies to the network.

“Our three new members decided to join Ausnet because they believe their individual businesses can benefit from our range of quality ‘one stop shop’ services, including training, mortgages, settlements and financial planning,” Mr Hosking said in early July.

“All members of Ausnet can maintain their own brand identity yet share in these quality services.”

“They all have the same issues – questions such as, ‘How do I get my reps to do what I want them to?’ – and the networking helps with this,” Mr Hosking says.

Michael Sheargold, founder and CEO of the Real Estate Results Network (RERN), has based his network on the premise of the collective being more powerful than any one member.

RERN, which incorporates some of the leading independent agencies from across Australia and New Zealand, aims to help non-competing independent agencies share ideas and learn from each other. RERN also provides business access to training programs, systems and strategies, including online resources.

“None of us are as smart as all of us,” is RERN’s mantra, Mr Sheargold says.

“One of RERN’s policies requires members to submit four innovative ideas each year to be shared with other members. With around 30 members, that’s more than 120 ideas from which they can learn every year.”

THEME TWO: VALUE FOR MONEYBeing able to extract value for money from a franchise fee remains a key concern of all franchisees.

Yet what isn’t so clear is whether a franchise fee is the ‘dead cost’ that many might claim it is. Franchisors can rightly point to the many services they provide as justification for their fee.

“Perhaps the most significant reason independence remains popular is the perception that belonging to a network only [takes from] the bottom line; that it doesn’t add value or increase profits,” Mr Bunn says.

That’s not to say that membership of a group has no monetary value, he continues.

“Some agents seek membership of a network in the belief that its brand will make them a success,” Mr Bunn says. “The most professional, however, identify that benefits flow from economies of scale; that hundreds of businesses investing in technology, marketing and professional development can achieve more than a single business.”

“There will always be small businesspeople who prefer to trust their own instincts and do things their own way,” adds Mr Green. “However, you’ll find there are those that like the idea of being part of a network and attending conferences and training with their peers, sharing business ideas.

“They also appreciate the economies of scale from being part of the network.”

“We’d like to look at ways to trim back the fixed costs involved in running an office as this will free up more money for growth,” he says.

“For example, we will be reviewing our management systems to see whether there is greater opportunity for technology to supplant some support roles. In turn, these savings can be reinvested in more support or agents and principals via additional recruitment, retention, relevant technology, the latest training and so on.”

Mr Kelly says franchisees can only get value for money if they have the motivation to get what they can out of being part of the network.

“More often than not it’s a case of working to get more out of being part of the network as opposed to expecting to be spoon fed from the franchisor or parent company,” he says.

Glyn Morgan, chief executive and managing director at The Professionals, says operating an independent agency may appear more cost-effective until you factor in all of the support you’ll still need to secure.

“A lot of people go into independent agencies thinking it will be cheaper but they find they struggle without the support and they find it is more expensive in the long run,” he says.

“I think to go it alone you need a lot of knowledge across all areas of the business or you need to surround yourself with very good people who can provide all the support and training that you normally get through a network.”

“I honestly believe, for the fees charged, they are out of step with the market as to what agents need to run successful businesses,” he says.

“To charge an agent more [percentage of turnover] because they do better in a particular month is basically wrong in my opinion.”

His own licence-based model involves a “low establishment fee and ongoing monthly fee”, according to the company’s website. For this, agents who join his network receive “stationery, signage, state of the art online marketing tools for listings, personal marketing tools, personalised branding, a presence on our website, an office operating system, RP Data access for their whole state and access to a network of highly successful agents.

“Most importantly, there’s no paying a percentage to any head office and it’s this heightened reward for effort ratio which makes our proposition so attractive,” the company says.

Mr Davies’ remarks on franchise fees, along with his own company’s model, highlights the debate surrounding the perceived popularity of ‘flat fee’ franchise arrangements, as offered by some real estate groups.

“We are a member-driven group so we are always looking for smarter or more efficient ways of doing business for our members,” he says.“I think in the next few years you will see a lot more principals switching to member groups because of the value for money that they represent.”

Another group that offers this flat fee arrangement is Richardson & Wrench.

“The franchisor needs to adapt to provide a fee structure that is fair and reasonable for the level of brand support and technology tools that they provide to the operator,” Mr Flynn says.

“They also need to keep their hands out of the franchisee’s pockets. Richardson & Wrench, which offers a flat fee franchise agreement, does not believe that the percentage-based system will survive for much longer.”

“Some [principals] consider a switch [of companies] after questioning the amount of money they are paying in franchise fees when the value of what they are contributing is generated by themselves.”

THEME THREE: PEOPLE AND CULTUREAs one real estate group pointed out, this was one area about which the Switching Networks survey didn’t explicitly ask.

Yet it’s often a company’s culture that has the biggest influence on who they’ll work for.

For Mr Chmiel, it’s the LJ Hooker culture – “family and supportive” – that’s one of the group’s key strengths.

“Our network is connected; they help each other through mentoring, peer partnerships and cell marketing, to name a few,” he says. “This factor is another key to our success and is shared and supported by the franchisor.”

Mr Green concurs. “The culture of a network is generally a key driver for new recruits,” he says.

“At Raine & Horne, we are a family-owned and operated business with a long and successful history. Our brand gives a fledgling real estate business instant recognition, which can take many years to build should an office try to launch as an independent. Brand is not simply about the look and feel of a signboard or office; rather it’s about intangibles such as longevity, reliability and a trust that the agent they are commissioning to sell their home will get the job done.”

Mr Morgan points to The Professionals’ membership model as a key point of differentiation.

“Simply the name ‘membership’ paints a different image to many other groups, with the measure of our success not being about return to shareholders but rather value for money for our membership,” he says.

“The culture within this type of entity is gold, and accordingly, we find significant sharing and camaraderie with the view we are all here to be successful. This culture flows through to our social responsibility where we are one of National Breast Cancer Foundation’s top seven supporters, alongside the likes of Qantas, Foxtel and David Jones.”

Supporting charities is a major focus for a wide variety of real estate groups and independents, suggesting how important this is not only for the charities receiving the support but also for the staff at these companies.

Closely linked to culture is the important role people have in an agency’s success, and having the right people forms the cornerstone of Mr Kelly’s growth plans.

“If the right, well-trained people are in place, the rest will take care of itself,” he says.

He also believes his model will help generate commitment and longevity from his group’s partners and their staff.

“Ensuring that all staff have some form of equity in their individual business, no matter how large or small, makes sure that all team members remain focused,” Mr Kelly says.

“They aren’t ‘looking over the fence’ at other potential opportunities as they are happy where they are and are building some value into their own shareholding. They tend to support each other better, as when everyone is doing well all shareholders know that they will receive a better benefit in the long term.”

Mr Kelly, whose group is looking to double its shop front numbers in Tasmania in the near future, and plans to build a presence on the Australian mainland, will only seek to expand if he can find the right partners.

“We are not interested in growth for the sake of growth,” he says.

“We are only after the right people, which is quite different to the franchise model. We know that once a person becomes a shareholder in our business that they need to be the right person otherwise the longer term may be detrimental.”

Mr Hocking is equally careful when it comes to recruiting new franchisees.

“Candidate selection is so important,” he says. “It’s normal that a bit of movement will happen in flat markets. Turnover starts to slip, and we look for reasons we must not be going well. A new brand might be seen as the answer. There’s a little bit of that happening.

“At the end of the day a lot of the movement is about people wanting real leadership and real direction.”